e-Business Models, Value Concepts and Strategies

ACC 622 Electronic Commerce

Agenda
Business Models The Impact of the Internet on Business E-business Configurations for Creating Value, Internet Effects The 3 Barriers to Success in E-business Small Business and e-commerce Strategy

Business Models
A business model may be defined as the manner in which a business organizes itself so as to achieve its objectives, which normally involves the generation of profits. The method by which a firm builds and uses its resources to offer its customers better value than its competitors and to make money doing so. - Afuah and Tucci A summation of a firm's core business decisions and tradeoffs employed to earn a profit; encompasses revenue sources, cost drivers, investment size, and critical success factors (Notes on Business Model Analysis - HBR

Business Model Components

External Forces Markets/formats Customers Core Business Processes Core Products and Services Alliances Strategic Management Process Resource Management Process

External Forces: Impact of the Internet on Business

Mediating technology Universality Network externalities Distribution channel Time moderator Information asymmetry shrinker Infinite virtual capacity Low cost standard Creative destroyer Transaction-cost reducer

Opportunities Presented by E-Business

Virtual organization Products and Services

Operations

Add value to products and services New pricing models

Marketing

auction, reverse auction

Promoting efficiency of business processes Streamlining SCM (supply chain mgmt) Disintermediation, reintermediation Trading Exchanges and Marketplaces

New markets, advertising and marketing Market segmentation

E-Procurement
New service models

Customer Support

individualized products/pricing

Market Intelligence Developing new sales channels on-line

direct access

Public Relations

Communicating with stakeholders

Transaction processing

Dis-Intermediation/ Re-Intermediation
With Internet Commerce, the value of the traditional intermediary is challenged More and more manufacturers sell directly to consumers Dis-intermediation is the process in which unnecessary steps are removed from the Value Chain A new breed of intermediaries is born: those who use the Internet to provide value-added services both to consumers and manufacturers Some of the new intermediaries are called Infomediaries they provide information that stimulates and facilitates online business improvements

Customer Value: How to Offer

Differentiation through:
Product features Timing (first in) Location Service (repairs, support) Product Mix (choice) Linkage between functions Linkage with other firms Reputation (Brand Name)

Or Low Cost

Customer Value: Other factors

Scope: market segments; how much product in each category should be sold to each segment Pricing strategy: consider fixed and variable costs; market share and margins; role of lock-in; bundling Pricing includes menu, one-to-one, auction, barter Consider all sources of revenue Which activities to perform (value configuration important here): consider strengths, industry success drivers, how to make industry more attractive to self Implementation: structure, systems, people, culture

Capabilities and Sustainability

Capabilities: resources, competencies, competitive advantage Tangible Intangible Human Sustainability: 3 generic strategies to achieve this:

block (e.g. patents); run (continual innovation); team-up (pool with others' resources)

Agenda
Business Models The Impact of the Internet on Business E-business Configurations for Creating Value, Internet Effects The 3 Barriers to Success in E-business Small Business and e-commerce Strategy

Agenda
Business Models The Impact of the Internet on Business E-business Configurations for Creating Value, Internet Effects The 3 Barriers to Success in E-business Small Business and e-commerce Strategy

Continuum of Internet Business Models

Focused on physical sites w e ith capability m ainly used for brochures, flyers and coupons to attract custom to ers physical sites; e.g., bakkaphoenixbooks.c om Predom inantly physical sites w a ith Internet store as an alternative channel for som or all of the e entitys products or services; e.g., barnesandnoble.com C pletely focused om on the Internet w ith physical sites solely devoted to housing m anagem and e ent com erce m operations;e.g ., iTunes.com / audiobooks

Internet based ordering; supported by a netw of ork physical distribution or service sites; e.g., am azon.com

B ricks

B ricks & C licks

C licks

Markets/Formats and Customers

B2C B2B B2E G2C G2B Clicks (itunes/books) Clicks and Bricks (amazon) Bricks and Clicks (barnes and noble) Bricks (bakka)

Core Business Processes

Getting hosted (outsourcing) Credit Card Processing Marketing Training ASPs

Business Configurations
Configurations:
Value

(Afuah and Tucci, 2001)

chain Value shop Value network

Each is impacted by the Internet when it is deployed as an e-business

Value chain Value chain

Value Chain System: a chain of chains

Value Chain (Mfg/Distrib)

Primary activities:
inbound logistics operations outbound logistics marketing and sales service

Support Activities
infrastructure human resource management technology acquisition/development

Value Chain Implications; Internet Effects

Identify core solution and reproduce as efficiently as possible over and over Efficiency vs. innovation (cost versus differentiation) Process vs. product Internet impacts: Learn more about end users Increase geographic scope, shift time - more choice in inputs and manufacturing, testing Instanteous delivery of knowledge products Disintermediation possible Increased capacity

Value Shop (Service)

Primary activities:
problem

finding problem solving choice execution control and evaluation

Value Shop Implications; Internet effects

Customize service to needs of clients Increased geographic span, including for collaborative problem solving Information search enhanced by web, but information overload a risk Faster service delivery Scalability - info back to clients without human intervention Reduces information asymmetry (business risk)

Value Network (Brokering)

Primary activities:
network

promotion and contract management (e.g. acquiring customers) service provisioning (linking participants, collecting payment) infrastructure operations (physical and information, e.g. databases, financial assets, networks)

Opposite trend to disintermediation

Value Network (eg: financial services) 1

network promotion and contract management
build/promote sell

network

services evaluate risk contract monitor contracts terminate contracts

Value Network (eg: financial services) 2

service provisioning
deposit withdraw transfer

funds maintain account balances calculate interest

Value Network (eg: financial services) 3

infrastructure operations
operate

branch offices operate ATMs operate IT systems maintain liquidity link with other banks

Value Network Implications;

Size of network is the most important success factor (Internet compounds network economics)
Both

Internet effects

sides of brokerage need to be large Larger geographic scope (but more competition) Greater scale possible

Must provide a value added to be a successful broker (intermediary)

Value Configuration Implications

Choose the appropriate configuration and then focus on the activities crucial to that configuration Example: Amazon.com Value Chain - remove intermediaries, focus on logistics (shipping, warehousing) and operations (order processing) Value Network: Brokers information about book buying behavior, book descriptions - focus on personalization, collaborative filtering, information brokering, making network bigger

Core Products/Services and Revenue Models

Types of Business Models

B2C On-line Storefront (Value Chain)

Merchant Manufacturer sales, service Subscription (Value Network)

Utility (Value Chain? Value shop?) Infomediary (" ") Licensing Advertising (" ") Affiliate ( Value Networks) Community (Value networks? Value shop?) Brokerage (generally value networks)

Types of Revenue Streams Free Subscription Commission Transaction Fee Product/service sale (menu pricing) Bargained price

One-to-one Auction Reverse auction Barter

Core Products/Services and Revenue Models -2

Brokerage Model

Verticals

Classifieds (Workopolis) Virtual Mall (Yahoo shopping) Market Exchange (ChemConnect) Buy/Sell Fulfilment (E*Trade) Auction Broker (eBay) Reverse Auction (Ariba Freemarket) Transaction Broker (PayPal) Metamediary (Edmunds) Search Agent (MySimon)

Automotive (Cars4U) Travel (Expedia) Event Tickets (Ticketmaster) Jobs (Monster)

B2C On-line Storefronts

Retail (Amazon) Manufacturers (Dell) Shippers (UPS/Fedex) Financial services (Pres Choice, E-Trade)
Channel conflict an issue? Mixed versus pure models Content/news (Cnet, Znet) Entertainment (Disney) Grocery (Homegrocer) Travel (Expedia) Recruitment (Monster) Education (Athabasca)

Utilities
Loudcloud (formerly anyways) ASPs - IBM Compuserve Oracle (?) Metered usage or pay as you go approach
Micro-payments an issue here for

success

Infomediaries
Add Value by: Collecting and selling info about visitors Reduces marketing costs to suppliers Providing content and tools to consumers to get visitors May provide info exchange opportunity for visitors - recommender site (epinions.com)

Infomediaries: examples
Media metrix (hard: traffic) Biz rate (soft: shopper ratings) MSN Carpoint
Provides

vehicle information and sales referrals to dealers vertical portals

VerticalNet.com
Industry-specific

Advertising
Provide content, accept ads for a fee:
Banner

Ads Preferred Listings Pop ups, pop unders, etc. Doubleclick Yahoo
Requires high volume to work

Affiliate
AffiliateWorld.com Often implemented through exchanges of banner ads Avoids need to initially attract everyone to one site 0

financial incentives to affiliates for referrals Amazon has patent on process

Communities
iVillage GeoCities FamilyTreeMaker.com Idea of user loyalty and community

identification key, more so than traffic Revenue source from advertising, data gathering, donations

Brokerage
General Types

Verticals

Exchange (eBay)

Auction Reverse auction (Priceline)

Buyer aggregator (Freemarkets) Classifieds (Workopolis) Mall/Portal: single URL (Yahoo) Shopping agents (Compare.net)

Automotive (Cars4U) Travel (Expedia) Event Tickets Jobs (Monster)

Auctions
enabled by Internet: reduced overhead for buyers

and sellers types:

open-cry (English); e.g., e-bay model Dutch; (auctioneer driven; suitable for perishable items) e.g., bid.com; Adauction (perishable online and print advertising) single and multi-round sealed bid; 2nd price sealed bid issues: duration, anonymity, disclosure of supply level

Supply Chain
Corporate Procurement A type of B2B commerce application for internal purchasing of supplies within an organization through the Internet. EDI & VANS (e.g., Walmart) Manufacturers Cisco Distributors Service providers

Catalogues
Chemdex PlasticsNet.com (plastics) SciQuest.com (life sciences)

B2B Exchanges

Vertical

Vertical Examples

Fragmentation among buyers and sellers Inefficiencies in existing supply chain Critical mass of key suppliers and buyers Domain knowledge and industry relationships Master catalogues and sophisticated searching Adjacent verticals

Altra Energy (energy) Band-X (telecommunications) Cattle Offerings Worldwide (beef and dairy) e-steel (steel) Floraplex (florists) IMX Exchange (mortgages) PaperExchange (paper) Ultraprise (secondary mortgage exchange)

B2B Exchanges - 2
Functional

Functional

Degree of process standardization Process knowledge and work-flow automation expertise Deep content Customization

Examples

MRO.com (maintenance, repair and operating procurement) Employease (employee benefits administration) Celarix (global logistics monitoring and tracking)

Structure of a Market Exchange

Distribution
Primary
Power Raw

materials

Secondary
Manufacturing

equipment Office equipment

Services
personnel financial systems legal transportation/logistics

Types of E-Business Relationships and Interactions

Business Partner

Intranet
Internal System s M iddleware Server W Server eb

Extranet
Internet End Consum er

Internal System s

M iddleware Server

W Server eb

Business Partner

E-Commerce Relationships
Business Partner
Internal/Legacy App.

Business Partner

Internal/Legacy App.

Business Partner

Internal/Legacy App.

Intranet
Internal Systems Middleware Server Web Server Internal Systems Middleware Server

Intranet
Web Server Internal Systems Middleware Server

Intranet
Web Server

Extranet
Internet End Consumer or Small Business Client Internal Systems Middleware Server Web Server Internal Systems Middleware Server Web Server

Extranet
Internet End Consumer or Small Business Client Internal Systems Middleware Server Web Server

Extranet
Internet End Consumer or Small Business Client

Business Partner

Business Partner

Business Partner

Alliances and Trading Partner Relationships

Retailer to Customer Distributor to Retailer Manufacturer to Distributor Business to Financial Institution Customer to Financial Institution Financial Institution to Financial Institution Manufacturer to Supplier Corporation to Supplier

Summary of Business Design

Focus on customers Create value with continuous innovation Transform business processes into digital form Decentralize management but centralize

coordination Create an e-business application architecture Integrate, but plan for continuous change

Agenda
Business Models The Impact of the Internet on Business E-business Configurations for Creating

Value, Internet Effects The 3 Barriers to Success in E-business Small Business and e-commerce Strategy

The 3 Barriers to Success

B1: Attracting the Customer: On-line/Off-line Marketing B2: Making the Initial Sale: Value + Trust B3: Repeating the Sale: Maintaining Trust Web Site Design/Customization Achieving Customer Satisfaction

 The click-through rate*

The 3 Barriers: Common metrics

Browser to shopper conversion rate Shopper to repeat shopper conversion

rate
Conversion Rate Click-Through Rate Visitor-to-Shopper Conversion Rate One time-to-Repeat Shopper Conversion Rate Average Value 0% .0 0% .0 2% to 2% 2 2

* The process of a visitor clicking on a web advertisement and going to the advertiser's Web site. Also called ad clicks. click-through rate measures the number of times an ad is clicked not the number of times it is viewed.

The

The 3 Barriers: Example

Campaign $30 cpm Target audience 5,000,000 shoppers Cost = 5,000,000/1,000 * $30 = $150,000 Shoppers = 5,000,000 * .005 * .027 = 675 Acquisition cost = $150,000/675 =

$222/shopper Revenue = $150 Profit???

On-line

B1: Attracting the Customer: On-line/Off-line Marketing

Off-line
Radio Television Newspapers Newsletters/flyers

Banner ads On-line loyalty

reward signup/redemption

Lead Generation Newsletters/flyers

B2: Making the Initial Sale: Building Trust

P Size Trust in Store P Reputn P Risk Attitude Willingness to Buy

Jarvenpaa, S. L., Tractinsky, N., & Vitale, M.(1999).

Trust: Retail Site Appeal

Traditional A recognizable brand Location of the store Quality of the store, (cleanliness and neatness of the environment, presence of nice fixtures, lighting etc.) Friendliness, competence of the retail personnel Popularity of the store (including the number of shoppers purchasing simultaneously at the store) Length of business operation Internet Retail Context New brands appearing daily; traditional brands not necessarily as popular. Portal equals an up scale location? Almost anybody can afford to look first class. Contact with a live person is limited to support over phone, chat or email. Hard to know how many other people are shopping at the same time. The Internet is only a few years old; E-commerce is a recent phenomenon.

B3: Repeating the Sale: Web Site Design

keep it simple make it fast welcome the create communities service the customer think globally make shipping easy let the world know

shopper give directions build trust

B3: Keeping the Customer: What Do Customers Want?

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Attribute
Source: J. P. Morgan Report: eTailing and the 5 Cs, Dec. 9, 1999.

Customer Support On Time Delivery Product Shipping Product Content Privacy Policies Ease of Ordering Product Information Website Navigation Product Selection Product Price

Value Factors for On-line Retail

(Keeney, 1999)

B3: Keeping the Customer: Customer Satisfaction Maximize product quality

Minimize cost Minimize time to receive product Maximize convenience Minimize time spent Maximize privacy Maximize shopping enjoyment Maximize safety Minimize environmental impact Offer personal interaction

How to satisfy?
Minimize fraud Assure system security Maximize access to information Maximize product information Minimize misuse of credit card Minimize misuse of personal information Assure reliable delivery Limit impulsive buying

How to satisfy? - 2
Maximize accuracy of information Enhance comparison shopping Make better purchasing decisions Maximize product variety Maximize product availability Offer personal interaction Maximize product availability Minimize personal travel Maximize ease of use

Resource Management
Technological Financial Organizational Operational Cultural/Language

Agenda
Business Models The Impact of the Internet on Business E-business Configurations for Creating

Value, Internet Effects The 3 Barriers to Success in E-business Small Business and e-commerce Strategy

E-Business for Small Business

Opportunities Barriers Building the E-business presence

Thank You